Let’s say that there are two types of grapefruits: Low-quality, and high-quality, and consumers buy a...

Let’s say that there are two types of grapefruits: Low-quality, and high-quality, and consumers buy a mix of the two, with high-quality grapefruits being more expensive. T/F/U: If the government puts a single, binding price floor on all grapefruits, the average quality of grapefruit consumed will rise.

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If the government puts a single, binding price floor on all grapefruits, the average quality of grapefruit consumed will fall. As the government has put a single binding price floor on all grapefruits, all the producers have to sell at prices which are at least equal to the price floor. Therefore, the low quality grapefruits sellers would be selling at prices which would be higher than their usual prices ( As it is a binding price floor, the price floor will be higher than the equilibrium price ). Their prices will now become closer to that of high quality grapefruit prices. This will lead to information asymmetry amongst the grapefruit consumers, which would make it difficult to differentiate between the grapefruits. This grapefruit producers also now have the incentive to produce low quality grapefruit since they realize that the consumers now can not differentiate the quality of the fruits based on their prices. This would ultimately lead to a higher amount of low quality grapefruits being consumed than earlier.

Rahul Sunny answered 1 year ago

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